Moneta Money Bk

Dear ladies and gentlemen, welcome to the conference call of Moneta Money Bank. At our customer's request, this conference will be recorded. As a reminder, all participants will be in a lock-in-only mode. After the presentation, there will be an opportunity to ask questions. If any participant has difficulties hearing the conference, please press star key followed by zero on your telephone for operator assistance. May I now hand you over to Tomasz Spurny, Chief Executive Officer and Chairman of the Board of Directors. Please go ahead, sir.

Good afternoon, ladies and gentlemen. I have the pleasure to open our conference call. Throughout the conference call, we will refer to the presentation that we published on our website this morning at 7 a.m. It's titled... First Half 2020 results. So let me begin. I'll turn to page number four. We have the pleasure to report that Moneta had become the most awarded bank in Czech Republic. We received 10 awards in a fairly prestigious local competition called Golden Crown. The awards really focus on our digital banking and innovation. Secondly, on page number 5 you see that we were upgraded by MSCI index on environmental, social and corporate governance dimension from BBB to BBB and we believe that the progress in how we are perceived as a quality company will continue to improve also over next 12 months. On page 6 We would like to highlight the key developments of past quarter. If you look at this page from operating income perspective, the bank generated 6.6 billion crowns. This is obviously colored by the acquisition gain that we've made on entities purchased from Western Road. Nonetheless, I believe we have good news on operating expense level. we have incurred costs of 2.7 billion. This is spot on 50% of our full year guidance. So we have a high level of confidence that we will fulfill the guided cost base. On pre-impermanent profit level, the performance of Moneta improved by more than 48%. This is a combination again of the acquisition and or underlying performance. On cost of risk, we have taken a position to really try to provision downside to the bank related to potential consequences of the COVID pandemic. We have incurred cost of risk of 2.5 billion. This has three components. First and foremost, COVID-related charges, standard $1.9 billion. We've also provisions under purchase accounting, the acquisition of Western Road. That was the second component. And third component is core risk performance of the bank, which actually stood at 40 basis points. So we have a bit of counterintuitives. situation. Nonetheless, we have taken a very hard approach on trying to eliminate future risks from future performance of the bank. Net profit stands in this first semester at 1.2 billion crowns. On page 7, continuing with the highlights, The net acquisition gain is 900 million crowns. This is basically delta between what we've booked on excess of fair market value over purchase price, which came in at 1.1 billion, and the provisioning. So the net impact is 0.9 billion. With respect to capital adequacy, the bank... maintains strong capitalization. We are at 17.4% and later on we will show you also evolution of our risk-weighted assets where we believe we have done a good job in managing that dimension of the bank. We also command now excellent liquidity translated into LCR ratio of 217 217 percent. Apart from balance sheet strength, the bank has grown considerably if you look at the lending portfolio growth that came acquisition combined with organic growth at more than 47 percent. And we maintain actually strong quality of balance sheet as of today. we have non-performing loan ratio of 1.6% in absolute level this translates to 3.6 billion of non-performing receivables and in the second semester of the year the bank plans to put on market 1 billion face value of non-performing loans so this is actually not in the guidance that you will you will see later, but we are committed to maintain strong balance sheet. Perhaps we can go now to page number nine, just few comments on the strategic KPIs that we follow. In building of the retail franchise, we are successful in a very strong development of the loan book. This is driven by mortgages, more than 135% growth, and also strong performance on unsecured credit, 28%. Both numbers include the acquisition of wisdom growth and obviously have the organic growth. On small business, we continue an expansion nonetheless. The COVID pandemic slowed down the expansion. We grew year on year. 20%, but like retail, we have experienced significant drop of demand for our lending products, both on consumer unsecured and on small business. In terms of SME banking, we have solid underlying growth of more than 14% with a stable commercial yield. and fairly good performance on incremental ROE from the franchise. Both on small business and SME later on in the presentation you will see that we have been super successful in distributing additional liquidity to our clients through state sponsored programs which are covered by state guarantees. So we are also, we have made a very good progress and contribution to stability on those fronts. On development of digital capability currently we are close to 43% overall share on retail unsecured lending through our digital channel and that is paralleled by more than 27% share in small business lending through our digital platform. So even though we suffered lower demand the digital channels are holding up and performing quite well. On risk management, as a result of the anticipatory provisioning that we have made, we have very strong coverage, close to 145% of the NPL portfolio, while we have reduced the NPL level to 1.6% this quarter, and with the anticipated sale of NPLs, we hope to manage the ratio at a low level. The cost of risk came on annualized basis at 269 basis points. Norman will provide a lot of detail on risk management, but we have three components here. First component are COVID-related provisions that comes at 200 basis points. Then Viston Road purchase accounting at 28 basis points. and 40 basis points relate to core performance of the bank. So the core performance of the bank actually counter-intuitively improves year on year. If we look at our capital position, 17.4% overall. The CET1 ratio stands at 14.4, so we have super solid capital. Capital position and we reduced quite significantly the overall RWA density and also the lending portfolio density. So the excess capital the bank is carrying at the moment stands at 5.3 billion. So we are well equipped going into the rest of the year. On cost, as I said, we came in with 2.7 billion This is respecting the previously announced cost-saving program of 500 million, where we have reduced the guidance by 500 million, trying to offset some negative developments in the P&L, namely reduced NII level. And we have successfully, we are continuing to reduce the overall shape of the Moneta's operating platforms. On page 10, I would like to comment integration of acquired entities on commercial performance in the category of building savings products, the deposit savings programs which are substituted by the state. We have actually improved the market share from 7.9 to 12.7%. This is due to Fantastic performance that we have throughout our branch network. So the commercial performance despite of COVID has been quite good. On front of rebranding, we have achieved legal rebranding. We have also integrated presentation of Western Road into our website and clients of Western Road can see their product through our Smart Bank Mobile Banking Platform. So we have done a lot on the client interfacing side in the first three months. Additional to that, we have filed applications with Czech National Bank to fully merge Western Road Mortgage Bank into Moneta proper and we trust that we will be able to achieve that at the end of 2020. On synergies, we have reduced staffing of Western Road from 280 employees that came with the bank to about 140 and decreased annualized compensation and benefits category by approximately 60 to 65%. So we are well on the way to achieve the target of cost synergy of 300 million annually. In this respect, we have also fully moved all of Distinro's employees into Moneta's headquarters. We have been able to vacate the headquarters and currently are negotiating a sub-lease for the 5,200 meters of space that we no longer need. On IT, we have discontinued both primary and secondary data centers of Western Road, moved them onto our location, and we have a fairly detailed plan how to change the application landscape to Moneta standard over the next 12 to 24 months. So this is going fairly well, and I would say that we have accelerated the schedule somewhere between three to six months. And we have also enacted a retention program for 15% of new employees and are motivating them financially and otherwise to remain with us into the future. On page 11, just a brief comment on the shape of Moneta's platform. Now we operate 160 branches of Moneta. This is close to 40,000 square meters. We have inherited network footprint of 100 points where Western Road actually controls 40 of them. And we are enacting optimization program. So by the end of the year, you will see this number declining somewhat in search of synergies and creating, let's say, consistency with our own network. On ATMs, we have approved and are implementing a strategy of optimizing our ATM network to 550 machines, so we have a decline here, while on the other hand, we are modernizing the network, so by the end of the year on new ATMs, you will probably see an increase of 30 machines as we are trying to improve customer experience and eliminate certain risk of outdated equipment. On customer base, with the acquisition and as a result of organic growth, we now command customer base of nearly 1.4 million clients and you can see that that is significant 40%, almost 40% improvement. So one of the priorities going forward will be cross-selling of our daily banking products into this customer base and seek to improve strength of Moneta on the basis of acquisition. We continue to attract customers into our digital channels. This was somewhat the rate of growth. Someone slowed down in the second quarter due to the lockdown measures and such. The performance is satisfactory. On the employment level in the bank, we have increased FTEs to 3,100. You will see this number coming down in the next six months below 3,000. And you can also see that Moneta year-to-year decreased or improved productivity at a relatively good rate. Now, let me skip two pages and turn into the operating environment where we start on page 14. With respect to GDP forecast, we had used the forecast of 8% decline on the GDP. The latest number year on year shows mid-year decline of 10.7% against market consensus, which was around 12 to 13%. So the performance of Czech Republic is slightly better all considered than what was expected by the market. On 2021, we hope and pray that the economy rebounds at the level of 4% growth of the GDP. That, connected with the macroeconomic indicators, the latest numbers show But not only we've had highest historical drop in GDP, but we also have four consecutive quarters of falling industrial production. And the number in the second quarter is quite frightening. The drop in industrial production was at the level of almost 30%. We so far have seen slight firming up. of the exchange rate against Euro and inflation so far remains at 3% level. Unemployment has not popped up. This is due to the effort of the government to keep people employed through direct and indirect subsidies. So far, the operating environment has not really has not really shown any tangible worsening, but there are many reasons for concern going forward. On interest rate swaps going clockwise around the page, you can see the dramatic movement on interest rates. I will not comment this. This is pretty much similar to what we had used in the last quarter, and the like situation holds for government bond yields which have declined very considerably. Now going into evolution of the market on page 15 if you look at the deposit market in Czech Republic we have nearly 5.4 trillion crowns in overall deposit stocks Moneta now stands at nearly $253 billion. This is almost a $100 billion increase in the last 12 months. So you can see that about 60% of the delta comes from Western Road acquisition and 40% is of our own success in building the franchise of the bank. The growth rate on retail all-in is close to 90% against market growth of 9.3%. So we have grown nearly 10 times against the pace of the market, and we also enjoy strong performance, 14.5% on commercial deposits, where, as you know, we tend to focus our franchise on self-employed individuals and small companies, so our performance is actually quite good on the deposit side. Then turning page to page 16, you can see the performance on lending side. The Czech credit market stands now at 3.2 trillion crowns. Moneta stands at 223 billion. If you look at the absolute delta, 12 months ago we were at 151, so we've added about $71 billion to the balance sheet, and of that, roughly two-thirds are coming from Western Rock, and one-third is the organic performance of the bank. So on retail, against the market, which grew 5.7%. The bank shows almost 13 times level of market growth at 73%. And we've also have done a very good job on the commercial, where we grew 15%. This is mainly due to our focus on the COVID safe guaranteed program. From here, I would like to say that I'm tremendously proud that our participation with those programs far exceeds the bank's natural market share. We have around 13% to 15% share in those programs. We have done more than some of the large banks. I will not name them. And not only that we are helping our customers, but we are also fortifying the quality of collateral underneath our commercial book. and this will benefit the bank into the future. On the next page, on the page 17, we publish as usual the pricing position of Moneta. We have May numbers here due to the fact that the market numbers were not available at the time of publishing. If you look at the consumer unsecured lending, We operated by May at level of 9.4% against market rate of 7.8. So significant premium attained. However, the volumes were halved and they were halved due to lack of demand. We've also tightened our credit criteria and this is the result of that. In the third quarter, We anticipate to operate in the range of 8.1% to 8.3% price point due to the fact that we try to catch up some of the lost production in this current quarter. On mortgages, we enjoyed 10 basis points premium against the market. Moneta did new business at 2.6%, which is the contractual rate against market average of 2.5%. Then on commercial deposit pricing we maintain steady cost of funding at 15 basis points and on retail again for last three quarters we have fairly steady position. You will see the 79 basis points coming down quite dramatically throughout third and fourth quarter as we are in the process of repricing about 80 billion of our 182, 587 billion of deposits. 80 billion have been notified and the impact will be visible in the third and fully in the fourth quarter of this year. On COVID related measures, I will skip the government and central bank if there is very little new apart from lowering of the counter-cyclical buffer. And let me go to page 20. The consequence for Moneta is that we have made available the loan repayment moratorium as mandated by legislation of the country. The total portfolio under the moratorium is $34 billion. Currently, in the month of July, $18.2 billion of exposures should return back to service, repayment of debts. and in October we face additional 15.8 expiration of the moratorium so far the anecdotal evidence that we have in the third quarter indicates that we are not seeing any issues with any significant issues with clients coming back to ordinary repayment of the loan so there is some let's say positive anecdotal evidence, but we have to wait till end of third quarter to see what happens on the first portion of moratorium that expires. On the COVID programs, I mentioned it. We have done really very focused job. The bank worked over many weekends and we've achieved excellent market share. What is perhaps more important than that is the government allocated to us $10.8 billion of COVID-related guarantees under the COVID-3 program. So in the second semester of the year, the bank will push to seek to distribute this and improve the collateralization position that we have underneath the commercial book. On credit policy, we have reviewed the IFRS 9 models We have also redone some of the staging algorithms and we have implemented a very focused monitoring bottom-up so that we classify exposures according to the underlying reality. So we have done a lot of work on that. The last one is that we were forced to cancel the annual shareholder meeting that was supposed to take place in April. Now we are announcing a new date. This will be 2nd of September 2020 and later on in the presentation we also have the highlights of the program. The invitation will be published early next week. And now let me turn to guidance. The guidance is set forth on page 22. If I simplify the pre- and post-COVID guidance on a cumulative net profit level for the years 2020 through 2022, the COVID we anticipate to cost the bank 5 billion crowns at the level of net profit. Specifically, with the updated guidance, The minimum, and I would like to over-emphasize, underline both, the word minimum target for this year is to deliver $2.1 billion, next year $2.7 billion, and the year after $3.8 billion. If you look at the cost of risk charges, we effectively believe that this year, even with a heightened mid-year charge, we will fit into below the 200 basis point ceiling on combined portfolio of the bank, and we will front load enough provisions to absorb whatever formation of MPLs we might have in 2021. So in 21, we estimate the range to be at 80-200 basis points, and in the following year, Hopefully, the situation will normalize to 40 to 60 basis points. On operating income, the first year of the forecast or of the guidance is colored by the 1.1 billion extraordinary gain from acquisition of Western Road, so from organic or core performance perspective, there is actually growth built into the number if you eliminate the impact of the acquisition. On cost base, we are committed to manage the cost base at maximum of $5.4 billion. This should be assisted by extraction of synergies from the acquisition, countering inflation inflation effects that we will certainly experience over next couple of years. Additional to that, this year, and we will continue in the practice, we are recognizing only 20% of our quarterly earnings into regulatory capital. We are accruing 80% dividend. So we do believe or we try to believe that next year we will come back to normal and we will settle dividends due for 2019 and whatever 80% payout on the year 2020. So I thank you very much for your attention and I will turn it to my colleague Jan Fritschek who will provide you with highlights of the P&L and with bit more detail on the P&L lines development.

Thank you so much. Good afternoon, ladies and gentlemen. I'd like to go through the profit and loss development starting on page 24. So much already summarized key numbers of our financial platform and hence let me just add couple of comments. Our revenue generating capacity remains strong accompanied by focused cost management and prudent provisioning. With respect to change interest rate environment and very strong liquidity position, we started with repricing of about one-third of our customer deposit base, which should help to partially offset pressure on the interest margin. I will comment on this in more detail later in the deposit section. Page 25 continues with the decomposition of the net interest income trend. The main driver was 25% growth of lending interest income amid our long portfolio expansion, further supported by acquired entities. The income growth was partially offset by higher cost of funds customer deposit base, which expanded by 63% over the last 12 months. On the next page we provide you with the evolution of net CM commission income, Reaching 457 million in the second quarter, which is by 5.6% less comparing to the last year. This drop was primarily driven by the income side going down by 9%, which I will further comment on the following page, and was partially offset by lower PN commission expense. On page 27, we decompose the income size into three parts. If I go from the bottom up, declining trend of the servicing and penalty fee income was reversed in the second quarter into a year-on-year growth of 5.4%, positively impacted by acquired building savings product generating monthly servicing fee. Drop of transactional activity since the COVID-related restrictive measures were put in place together with the regulation of cross-border payment fees resulted in 23% decrease of income year-on-year. And in the second quarter, we reported the decline of the third-party commissions by almost 10%, where primarily the distribution of insurance products and specifically payment protection insurance was severely impacted by lower new production of unsecured credit amid pandemic-related uncertainty and loan payment moratorium. Now we move to cost-based development on page 28. There you can see a 13% euro-near increase predominantly driven by running cost base of newly consolidated entities plus the initial cost of their structural integration in Moneta. The pre-equalization perimeter, we achieved 2.5% cost reduction through savings on discretionary expenditures, revised investment plans for this year, and also further productivity improvements. Our cost-to-income ratio for the second quarter stood at exceptionally low level of 37%, positively impacted by one-off gain on acquisition. And on top of the last page of this section, you can see development of our brick-and-mortar distribution. It's worth mentioning that these numbers do not reflect the acquired tight-engine network operating slightly different distribution model with 103 operators. In the bottom chart, you can follow evolution of the workforce. At the end of June, we employed 3,112 FTEs, which is broadly flat year-on-year. However, in the meantime, in the second quarter, we added to the group 280 employees of mortgage and building savings banks. And as Tomas already mentioned, we are now focused on further productivity improvement through structural integration of both acquired entities and leveraging existing capacity and moneta. Now I will hand over to Andrew who will continue with the balance sheet development.